What is a 1031 exchange? How does it work? What do you do if a 1031 exchange falls apart on you? These are some of the questions that might pop up if you’re planning a 1031 exchange. If you’re new to this concept for the first time, it might sound a little confusing. So, first, let’s check out what is a 1031 exchange.
What Is A 1031 Exchange?
In very simple terms, 1031 exchange allows you to take an investment property (not your personal residence) and sell it. However, instead of paying taxes on all the appreciation or capital gains from the sale, you take your money and put it into a ”like-kind” property. Essentially, a like-kind property is just another piece of investment property. In effect, investors can change the form of their investment without (as the IRS sees it) cashing out or recognizing a capital gain. So, that’s pretty simple to understand.
Although most swaps are eligible for taxation, if the conditions of 1031 are met, investors will either have no tax or limited tax due at the time of the exchange.
In effect, investors can alter the form of their investment without (as the IRS sees it) cashing out or identifying a capital gain. It enables the investment to continue growing with tax-deferred. There is no limit on the number of times or the frequency a 1031 exchange can be performed.
Is 1031 Exchange Convenient?
The IRC Section 1031 requires you to identify a property within 45 days. Once the property has been identified, you get 180 days to complete the process of exchange. If you’re unable to close the deal within 180 days, then you’re out of luck, and you can end up paying huge tax bills. There can be a lot of runs around as the deals don’t always go according to your plans. The good news is there are qualified intermediaries who manage the entire process for you and prevent the deal from getting harpooned. Instead of you having to sell your property outright and then doing the whole thing yourselves, the qualified intermediaries identify the like-kind properties and diligently complete the exchange within 180 days. It’s a streamlined system that handles all of the forms, red tape, and paperwork.
Final Word
A 1031 exchange is perhaps the number 1 way to build wealth these days. The tax benefits are immense as you roll one asset into another. Intermediaries make the job really easy by completing the identification of like-kind properties in 45 days and closing the deal within 180 days. Tax deferment can be a very effective tool to increase your capital gains over time.
1031 Exchange gives you the power to extract the maximum profit for yourself. However, the exchange process can be very tricky in nature, and it’s pertinent to take professional guidance from expert professionals or qualified intermediaries. Our extensive experience in handling highly profitable exchanges for our diverse client base makes us reliable real estate experts.
For consultation and assistance regarding 1031 exchange call – 888-395-0046 or email us at info@1031sponsors.com